The Lloyds share price still looks cheap ahead of results

The Lloyds (LSE: LLOY) share price is on a roll. At 52p, as I’m writing, it’s up 40% over the last 12 months, and has more than doubled since its pandemic lows of September 2020.
 
These are impressive gains in anybody’s book. But the stock still looks cheap on a number of valuation measures.
 
The company recently compiled and published an updated consensus of City analysts’ forecasts ahead of the group’s annual results, scheduled for 24 February.
 
Let me walk you through these hot-off-the-press expectations for the 2021 numbers. And the latest forecasts for 2022, 2023 and 2024.

Upgrade

For 2021, analysts now expect Lloyds to deliver net income of £15.5bn, an underlying profit before tax of £7.84bn, earnings per share (EPS) of 8.1p and a dividend of 2.07p per share. Year-end tangible net asset value (TNAV) is forecast to be 56.6p per share.
 
All of these numbers have been upgraded from the full-year consensus Lloyds published ahead of its Q3 results. And it’s on the back of these upgrades that the stock still looks cheap.

Discount assets

Lloyds’ price-to-TNAV (P/TNAV) is 0.92, meaning buyers of the shares today are paying 92p for every £1 of the bank’s assets.
 
To give this some historical context, in the years between the Brexit referendum and the pandemic, the stock traded within a P/TNAV range of 1.15 to 1.35. If the market reverted to valuing the stock in this region, the shares would be trading somewhere between 62p and 73p (20%-40% upside from the current level).

Cheap earnings rating

In addition to the discount asset valuation, Lloyds is cheaply rated on its earnings. The price-to-earnings (P/E) ratio is just 6.4 — about half that of the FTSE 100.
 
However, the 2021 EPS forecast of 8.1p is elevated by an exceptional impairment credit. This is due to a chunk of the big impairment charge Lloyds took in 2020 reversing in 2021 on an improved macro-economic outlook.
 
With a normalisation of impairments expected going forward, analysts are forecasting EPS of 5.6p for 2022. On this basis, the P/E is 9.3. Not as cheap as calculated on the exceptional 2021 earnings, but more realistic and still a significant discount to the wider market.

Sector-leading dividend yield

A third value indicator is Lloyds’ sector-leading and above-market-average dividend yield. The expected 2021 payout represents a yield of 4%.
 
And while 2022’s EPS is set to drop back from its elevated 2021 level, the same isn’t true of the dividend. The consensus is for a 17% rise to 2.42p, lifting the yield to 4.65%.
 
Furthermore, analysts see a rosy outlook for shareholder returns beyond 2022.

Excess capital distributions

The outlook is underpinned by Lloyds’ strong capital position. The consensus view is that the bank’s year-end 2021 Common Equity Tier 1 (CET1) ratio will stand at 16.3%. This is significantly above a regulatory minimum requirement of 11% and Lloyds’ ongoing target of 12.5% plus a management buffer of 1%.
 
The City expects the company to announce a distribution of about £1.4bn (2p per share) of excess capital in the upcoming results. And similar distributions each year through to 2024.
 
These distributions could be by way of special dividends (in addition to the attractive progressive ordinary dividend I’ve already discussed). Or it could be by way of share buybacks. The majority of analysts are currently forecasting buybacks.
 
Buybacks deliver value for long-term shareholders. Simply by sitting on their shares, such holders own a slightly larger slice of the business with each tranche of shares the company buys back. It also means entitlement to a slightly larger slice of all future dividend pots.

Margin of safety

It’s important to remember that analysts’ forecasts are exactly that. Forecasts. A company may meet, fall short or exceed them. And, as we’ve seen from the upgrade to the consensus on Lloyds since October, forecasts can change — for better or worse — depending on developments in the external and/or internal environment for the business.
 
Lloyds is a bellwether of the UK economy. The consensus numbers on things like impairments and asset quality suggest analysts are modelling a fairly benign external environment for the bank over the next few years. And looking at things like the cost-to-income ratio, they’re also modelling increasing operational efficiency within the business.
 
However, Lloyds’ discount P/TNAV, cheap earnings rating and high yield, suggest the market is valuing the stock for future downgrades. Personally, I think the valuation offers some margin of safety against downgrade risk. And that Lloyds may have investment appeal for me in the near future.